Cash-rich tech stocks abound

Of the many that fail, a few are bound to thrive

By

MikeTarsala

SAN FRANCISCO (CBS.MW) -- In the dark recesses of the tech market, there are opportunities to buy a dollar's worth stock for three quarters, or a quarter's worth for a dime.

Two years of turmoil have produced a record number of tech companies that trade for less than the cash in their bank accounts. If you want to buy a company with $100 million in cash on the books, you can find ones priced at $75 million.

There are more than 280 U.S. companies in just such a situation: They're effectively worth more to their shareholders dead than alive. Many long-term investors who rode the shares to their depths would love to see those companies liquidated if it would help them recoup some of their losses.

To be sure, many of the stocks in overcrowded tech markets will go under, leaving shareholders in the lurch. But a select group of money managers are placing fresh bets on the stocks they say have a good chance of rising from the near dead.

"There are plenty of tech stocks trading below cash, and we own a lot of them," says Paul Sonkin, an adjunct finance professor at Columbia University and manager of the Hummingbird Value Fund, which specializes in small, but cash-rich companies. "You can buy some really good businesses for less than the cash on the balance sheet."

Sonkin, who manages about $50 million in assets, started his value-oriented hedge fund in December 1999 -- pretty much at the height of Internet mania. His reasoning: The bubble was bound to burst, and he wanted to eventually take advantage of it.

And he has. The Hummingbird fund has posted net gains of more than 20 percent in each of the past two years. The fund is down about 1 percent this year, however.

Shareholders should know that there are huge risks in bargain-basement investing. If a poor management team can't generate new business and does nothing with its cash, the company will fall on its face. An even bigger threat is that a boneheaded management team wastes the cash on poor acquisitions, and sends the company to the poorhouse -- pronto.

The trick, of course, is to pick the right companies -- ones with good management that are slowly turning business around. They're hard to find, but they offer potentially large rewards.

One company that might fit the bill is Netegrity
NETE, -5.95%
says Mitch Meisler, associate research director at C.E. Unterberg Towbin in New York, who has been noticing more investor interest in distressed tech shares recently. Waltham, Mass.-based Netegrity makes software that lets companies offer their employees, customers, suppliers and partners limited access to different parts of their networks.

Netegrity's sales are down from last year, and so is the stock - off from a peak of more than $21 in the past 12 months. But it now trades at $2.10, which gives it a $72 million market cap, which is less than the roughly $84.4 million Netegrity has in cash on hand, according to Meisler.

"They have a strong management team, a good product lineup, zero debt and a good stock price," Meisler says. "It's a buy, both in the near term and the long term."

Another stock that some say may stand the test of time is Fremont, Calif.-based Read-Rite Corp.
RDRT
one of the top makers of magnetic heads used in hard-disk drives. The company is in deep financial trouble, as it lost about $78 million -- more than double what it recorded in revenue -- in its July quarter. What's worse, the company had only about $68 million in cash, equivalents and short-term investments left as of the second quarter.

But technical snags with a new product release may be behind the company, and Read-Rite could pull out of its long slide if it can sign some fresh contracts, says Alex Mou, a senior analyst with Hotovec, Pomeranz and Co. in San Francisco. If it does, he says, shareholders will be rewarded. The company has nearly $1 per share in cash, and it trades at 65 cents a share.

"Most people are assuming that they're going out of business, but we believe they have a shot," Mou said. "They've been in the business a long time. From a risk-reward perspective, we think they're worth the risk."

For all the companies trading below cash, there are even more that are trading slightly above their cash level that could be a good value, according to Sonkin. One such company is Varsity Group
VSTY
an online schoolbook reseller based in Washington, D.C. The company was founded by two law school buddies in 1998. They had ambitions of being the Amazon.com of textbooks. But in recent years, Varsity has set its sights on a smaller niche -- private and elementary prep schools. It had 60 clients last year.

Net loss for the quarter was $0.3 million, down from a net loss of $1.0 million in the second quarter of 2001. The company may be poised to turn things around, Sonkin says. He projects the company could earn nearly $1 million, or 6 cents a share, this year. Varsity Group has about 94 cents of cash per share, and it trades at $1.22.

Investing in distressed stocks isn't for shareholders who hate to do their homework. It isn't for the weak-stomached either, as most of the shares are volatile.

But Sonkin says his bargain-basement strategy is paying off. He says he's happy to trail the small-cap benchmark Rusell 2000 when it's up, if he can beat it when the index is down.

"I'm a hard-core value-investor. I like the classic value stuff," he says.

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